Positive Signs in the Mortgage Industry For 2017
Treasury nominee Steven Mnuchin has said that one of his first objectives will be to dismantle some of the more stringent aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by congress in 2010 as a reaction to the subprime financial crises a couple of years earlier. The bill’s aim was to place stricter conditions on banks when offering mortgages, thereby decreasing various risks to the U.S. financial system.
Some of the aspects of the bill include preventing tax dollars from being used to prop up firms that are in danger of becoming financially insoluble, breaking up banks that that are considered to be so large as to pose a systematic risk to the economy and a requirement that banks increase their reserve requirements. A key provision of the bill restricts the ways banks can invest, limiting speculative trading, and thereby strongly curtailing the kinds of investments banks can conduct. For example, banks are no longer permitted to be involved with hedge funds or private equity firms.
But the new treasury nominee sees serious problems with Dodd-Frank. Mnuchin argues that limiting the kinds of investments banks can make will simultaneously decrease their profit-making ability. He believes that these onerous restrictions will harm the competitiveness of U.S. financial institutions compared to their foreign counterparts, which will serve to make U.S. banks, themselves, less desirable assets in institutional and personal portfolios. In the new administration’s view, American banks will suffer in the marketplace from lower profits, resulting in less capital to loan, and therefore serve as a damper on the overall economy.
While critics of the bill see the value of some of its components, they are disturbed that imposing tight restrictions on how banks can invest make for a more illiquid market. The second major criticism by Mnuchin (and this is very important for those seeking a mortgage) is the requirement that lending institutions must hold a higher percentage of their assets in cash. This, according to Mnuchin, limits the amount of dollars (mortgages) a given bank can undertake. The incoming administration strongly believes that these restrictions on banks will hurt economic growth and should be eased.
Another potential boon for mortgage seekers is that the national conforming loan limits – the maximum mortgage origination balance that Fannie Mae and Freddie Mac are permitted to buy from the banks, has been raised for 2017 – the first raise since 2006. Mortgages above these set limits are known as jumbo loans which require far greater requirements for the mortgage seeker. In the second quarter of 2016, the Federal Housing Finance Agency’s (FHFA) home price index finally reached the level of the third quarter of 2007 – before the financial meltdown. This is important because once the home price index reaches pre-crises levels, Fannie Mae and Freddie Mac can raise the conforming loan limits. This allows the banks to extend larger mortgages to homebuyers.
On November 23rd, the FHFA announced that it would raise the baseline conforming loan limit for 2017. Importantly, the agency is also increasing the limits for certain “high-cost areas” that are above the baseline. For example, in most counties in the country, the 2017 conforming loan limits for a single-family home will be raised to $424,000.00. In higher cost markets, the limit can be as high as $636,150.00. The result is that many mortgages that were considered “jumbos” prior to November of this year will no longer be classified as such.
Taken together, the easing of Dodd-Frank regulations and the raising of the conforming loan limits should bode well for homebuyers in the near term.